The most tragic case happened in Texas. One of Koch’s neglected pipelines began to leak butane vapors into the air in the summer of 1996. Two teenagers named Danielle Smalley and Jason Stone were driving near the pipeline leak when it ignited and caused an explosion. The two kids were burned alive. Smalley’s family sued Koch and won a judgment of $296 million, another record-breaking amount. The family later settled for an undisclosed amount. These fines and charges, combined with those for the ammonia dumping at Pine Bend, marked Koch Industries as one of the largest, most flagrant violators of environmental laws in the United States during the 1990s.
But the judgments and indictments did not slow Koch down. This was a period when Charles Koch was focused more than ever on expanding, and expanding rapidly. The problems exposed at Pine Bend and elsewhere were not being isolated and contained. They were being exported.
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I. Other nonprofit groups included accountants, the human resources team, lobbyists, and lawyers.
II. In regulatory parlance, releases with enough pollution are called a reportable quantity, or an RQ.
III. While the area in question was referred to as a “wetland” and was near the Mississippi River, the area was not on a list of state-designated wetlands.
IV. Burgess left Koch after these events, and in 2002 he won an election to become a state district court judge in Sedgwick County, Kansas, where Wichita is located. He remained a state judge in 2015.
CHAPTER 9
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Off the Rails
(1995–2000)
Koch Industries executives gathered for a secret meeting at an offsite corporate conference room in Wichita. They were gathered to be told about a new strategic initiative. It is safe to say that this meeting is where the problems started.
The business leaders heard a presentation from a young Koch employee named John C. Pittenger. He was a new breed of Koch employee. He didn’t graduate from Kansas State University or the University of Oklahoma; he went to Princeton University for his undergrad and to Harvard for his master’s degree in business. Koch hired him from a consulting firm called Monitor Group, which was run by Michael Porter, the Harvard management guru who’d given some of the earliest seminars on competition strategy at Koch Industries in the 1980s.
Pittenger moved easily in the world of East Coast money. He knew the latest management theories, consulting trends, and buzzwords being handed down by the Ivy League. He could have easily worked for any firm on Wall Street, but he decided to leave that world and work for Koch. He did this after seeing firsthand how the company operated when Koch had hired him as a contract consultant.
Lots of other business school graduates were following in Pittenger’s footsteps. Koch was hiring more Ivy Leaguers and MBAs than ever before. The educated business class was finally catching on to what was happening inside the Tower in Wichita.
During the offsite meeting with Koch’s top executives, Pittenger helped explain how they’d be running their business over the next decade. They learned that growth would be more important than ever. It was time to expand. Time to take advantage of the economic conditions encouraging bigness in corporate America. In typical Koch fashion, the company developed a specific strategy to grow, one that came complete with its own vocabulary. The framework was called the Value Creation Strategy, or VCS.
Every Koch business leader was expected to create their own Value Creation Strategy. They needed to look for new companies to buy, new plants to build, and expansion projects for existing plants. This wasn’t exactly new—growth was ingrained in Koch’s DNA from the beginning, when Sterling Varner encouraged his employees to keep their eyes peeled for investment opportunities. But the VCS regimen was different. Business leaders knew that Charles Koch would cut or increase their bonus pay based on the Value Creation Strategies they delivered. Expansion was once applauded; now it would be required.
This change rippled out through the ranks. Deals were proposed and sent to Wichita—everybody wanted a big acquisition under their belt. Charles Koch had historically been merciless when it came to assessing these deals, but a certain bias toward acquisitions crept into Koch Industries’ decision-making by 1995. Koch’s own track record fostered this bias. Koch Industries’ sales were roughly $24 billion a year, more than 135 times what they had been when Charles Koch assumed control in 1967. The profits and the cash flowing in the door seemed to be proof that Koch’s philosophies worked. The company knew how to grow—the market itself had delivered its verdict. Charles Koch listened to that verdict. He pushed the company forward even more aggressively.
“There’s a tremendous focus on growth, okay, from Charles. . . . The whole thing is growth,” recalled Brad Hall, the Wichita State graduate who joined the company in 1975. Hall rose through the ranks to become a business leader by 1995, allowing him to work closely with Charles Koch as more and more acquisitions were being made.
As it turned out, Hall would spend many years of his life helping clean up the wreckage from those deals. It was wreckage that might have been avoided. “I think Charles got cavalier,” Hall said.
What resulted was a kind of perpetual motion machine: a company that grew and then cited that growth as justification to grow even faster. One employee, a rising star, would take this philosophy to heart. He was ambitious, smart, and determined to prove his worth to Charles Koch. His name was Dean Watson.
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Dean Watson joined Koch Industries in the early 1980s when he was just twenty-two years old, freshly graduated from Kansas State University. He was intense and physically imposing, standing six foot one, or “six foot two in cowboy boots,” as he likes to say. He had sandy red hair and a competitive streak that seemed woven into his muscle fiber. He’d been a star on his high school football team, but an injury kept him from playing in college. When he was sidelined from the football field, Watson found another realm in which he could compete. He discovered that he had a mind for finance and complex systems. He took business and accounting classes, and he excelled.
After he joined Koch Industries, Watson approached the world of business in the same way he had played sports—with the intensity of a coiled spring. He was a natural leader with a deep and commanding voice and a way of stating his judgments with supreme confidence. Watson could talk for hours about marginal profits and competitive industry dynamics and expansion opportunities. He shifted easily between abstract management concepts and microscopic operating details of anhydrous ammonia pipelines in the Gulf of Mexico. He didn’t tell people that they needed to follow a business plan. He said, “We need to execute violently against what we’ve been asked to go do.” Watson threw himself into his career. Koch was his life. He didn’t know his neighbors because he worked all waking hours at the Tower. And it made him very happy. He was part of something big.
Watson was fearless, and this might be part of what endeared him to Charles Koch. Watson’s colleagues and peers couldn’t help but notice his particularly close relationship with Charles Koch. Watson dropped into Koch’s office to share ideas and seek his mentor’s advice. If he was walking past Charles Koch’s office, Watson even felt comfortable popping his head in and interrupting the chief executive. On one occasion, Watson did so to talk over some arcane mechanics of oil prices.